4 ways to profit at the edge of the fiscal cliff

BOSTON (MarketWatch)—It’s impossible to say what, if anything, lawmakers will do as the U.S. economy approaches the so-called “fiscal cliff” at the end of this year. But investors need to have a plan, maybe two or three plans, to protect themselves.

At a minimum, you need to figure out what to do with your portfolio should the scheduled spending cuts take effect and the Bush-era tax cuts expire.

For instance, the maximum tax on long-term capital gains from the sale of securities would rise to 23.8% in 2013, up from 15% in 2012, according to Eaton Vance. Meanwhile, dividends will resume being taxed as ordinary income as they were before the Bush years. So, so you will pay—depending on your annual income—anywhere from 15% to 43.4% on dividends, according to published reports.

Harvest gains

Assuming the tax increases and spending cuts take effect simultaneously, harvesting gains in 2012 works for several reasons. One, (to state the obvious) your gain would be taxed at a lower rate if you sell now rather in 2013. Two, the length of time that you must hold a security to generate the same after-tax return is greatly increased should the Bush-era capital gains rate return. And three, you’re more likely to have a gain in 2012 than later, especially if the economy falls back into a recession and the stock market tanks.

If the U.S. falls off this fiscal cliff, the economy will probably contract 1.3% in the first half of 2013 and the unemployment rate would rise to 9.2%, the congressional Budget Office (CBO) said in a recent report.

Buy gold

Damon Barglow, an independent financial adviser, is among those who say the economic impact will be dramatic if the fiscal cliff becomes a reality. What’s more, he said, the outlook is even worse “when you factor in the payroll tax cut reversal and the removal of other sources of fiscal stimulus.”

If we go off the cliff, “growth in the U.S. will be even slower and the probability of a recession increases,” he said. So, his advice is to consider investing in gold, specifically the SPDR Gold Shares
GLD, -0.08%
even at current levels.

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